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Posthaste: Suddenly, economists are pushing back forecasts for the Bank of Canada's first rate cut Back to video

Good morning,

The latest numbers on Canada’s job market have moved the needle on when some economists think the Bank of Canada will make its first interest rate cut.

Labour numbers released Friday by Statistics Canada were unexpectedly strong, with a gain of 37,000 jobs that more than doubled forecasts.

That prompted some economists who predicted the first Bank of Canada cut in April to push back their forecasts until June.

“Although the sharp rise in employment in January may paint a healthier picture of the labour market than what is under the surface, the Bank of Canada will still be concerned about the renewed decline in the unemployment rate and the strength of wage growth,” said Olivia Cross, an economist with Capital Economics.

Capital economists and Desjardins Securities’ Royce Mendes both pushed back their forecasts for the first cut from April to June.

“The employment data suggests that June is now more likely for the first Bank of Canada rate cut of this cycle than April,” Mendes said in a report to investors.

There are several reasons why the data might concern central bankers.

First the unemployment rate isn’t rising as quickly as expected. In January it fell back to 5.7 per cent, the first drop in more than a year.

“For now, the labour market remains fairly tight,” said Toronto Dominion economist Maria Solovieva.

“The unemployment rate edged down, and remains low on a historic basis, and average hourly wage growth of 5.3 per cent year-on-year is still too discomforting for the Bank of Canada.”

A rise in hours worked also suggests a stronger increase in gross domestic product heading into the first quarter.

“Today’s data certainly won’t speed up the path to a first interest rate cut from the Bank of Canada,” said CIBC economist Andrew Grantham, in a note after the data came out.

Both CIBC and Desjardins now expect the Bank will cut less this year, wrapping up 2024 at 3.75 per cent, 25 basis points less than their previous forecasts. The Bank’s current rate is 5 per cent.

Markets too have made adjustments. The likelihood of a March-April cut has fallen below 30 per cent and expectations for rate reductions have slipped lower, said TD’s Solovieva.

The biggest takeaway from the jobs report is that “there are no obvious signs of stress for the economy,” said BMO chief economist Douglas Porter.

“A decent job gain, a slide in the jobless rate, and persistent 5 per cent wage growth are hardly the stuff of an urgent call for rate cuts. The Bank of Canada is likely to view this report as further reason for a patient policy stance,” he wrote.

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Canada’s working-age population soared in January, but nowhere was that pressure felt more than in the country’s biggest city, says National Bank economist Stéfane Marion.

Toronto’s population aged 15 and over increased by a record 32,600 people in the month, and as National’s chart shows, the local labour market couldn’t keep up.

The employment-to-population ratio of the Greater Toronto Area fell to 61.4 per cent, the lowest since 2021 when we were still in the midst of COVID-19 lockdowns.

“The GTA, which historically had an employment rate that was on average 0.8 per cent above the national average, is now suddenly below the rest of the country,” said Marion.

“A deteriorating labour market amid a population boom will continue to stress the infrastructure and finances of Canada’s largest metropolitan area for the foreseeable future.”

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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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